May 25, 2022

Bitcoin price: why it never returns

Bitcoin has a property that is relatively unnoticed and unknown to most people. I call him "The price point of no return." The price point of no return is when Bitcoin is at a certain price level for the last time. Having reached this price, he only moves up and never returns to this level.

The calculations are simple:

  1. We start with the very first available data point (in this case, July 19, 2010).
  2. Find the lowest price for the period from this date to the current day. For July 19, it was $ 0.05, recorded July 25, 2010. So, on the contrary, on July 19, we are recording the price of $ 0.05.
  3. Then go to the next day, July 20, and repeat the process.

When we get to November 4, 2010, the lowest price for this date will be $ 0.20, and for February 2011 - already $ 0.71. For April 2011, this value will already be $ 2.20, recorded on November 19, 2011. This means that after November 19, 2011, the price of Bitcoin never again fell below $ 2.20. She never comes back.

I noted these lower cost points, or price points of no return, on a lognormal time scale. The result was impressive.

The horizontal scale is “square timeroot ”, or the usual time displayed on a chart with a different scale (very similar to the lognormal). First day d (1) = square root (1), second day d (2) = square root (2), etc. Day 70 on the chart corresponds to 4900 calendar days, that is, 4900 days after July 19, 2010 - December 18, 2023. I explained the reason for using the “square root time” in the article “Bitcoin Spreads Like a Virus”. This, in essence, establishes a parallel between traditional concepts of the time value of money and the speed of Bitcoin adoption and, as a result, its price. But if in simple words, then it converts the price into straight lines on the chart - for convenience. This does not affect the actual price.

Two important things to say about this graph.

Firstly, the trend persists. And it has been preserved for more than ten years. More on this later.

Secondly, it is wrong to call it a “model”. This is a record of the actual history of Bitcoin: the lowest price for a changing time period.

The lowest price cannot be known in advance, and although at the time of writing this article it is $ 8064, its value may be lower if the price of bitcoin falls.

The red lines on the graph indicate the usual margins of error for a known period in the history of the price. Until now, the pattern formed on historical data looks very stable.

The lower margin of error is the minimumthe price level, acquiring bitcoins at which the investor almost certainly does not lose money, provided there is a sufficiently long planning horizon. Historically, the longest planning horizon necessary for payback when buying at this level was phenomenally short - only 61 days.

What does the chart tell us?

Suppose Bitcoin Holders Canconditionally divided into two groups. The first includes traders, speculators, just curious and yes, price manipulators. The behavior of this group of market participants is determined by short-term goals. They are responsible for such a wide range of price fluctuations, even on an annual basis.

The second group consists of long-term investors,Hodlers and those who intend to use Bitcoin for shopping in the long run. The behavior of this group of market participants is determined not only by long-term, but practically “unlimited” prospects. These are ideological supporters of Bitcoin, providing support and a certain basic level of its value. The participants in this second group, better than anyone else, are aware of what the above graph means.

Over time, the size of this group increased. This growth can be seen in the fundamental metrics related to Bitcoin: active addresses, hash rate, number of transactions, nodes and miners. It is this network of regular users that provides Bitcoin value.

The number of its participants is growing along the S-curve:

According to most researchers, the levelBitcoin adoption is not more than 10% of the possible number of users. The adoption of the Internet in the world today is from 50 to 60% of the possible number of users, and it has existed for about 40 years. For comparison, about 10 years after the advent of the Internet, its global penetration rate was 5.8% - very close to 6.2% of Bitcoin at the 10-year mark.

From this and other polls, one can conservativelyestimate the total number of Bitcoin users worldwide at 80 million people. In fact, now, most likely, there are about 100 million users. Moreover, it is expected that in the foreseeable future, this figure will grow to at least 180 million.

As long as the adoption of Bitcoin iscontinue, the general price trend for BTC, expressed as a “point of no return”, will go up. If the adoption will be significantly hampered by competition (for example, from Libra) or regulation, then the price increase may stop or be replaced by a drop.

The “point of no return” isbase value of bitcoin. The actual price may be higher, but if there is a significant discrepancy, it will again be adjusted to a baseline that is sustainable in the long run.

Will this trend continue? As I mentioned, we cannot know the next value of the lowest price in advance. Undoubtedly, there will be skeptics who will criticize this methodology, and healthy professional skepticism is useful because it helps keep expectations realistic. On the other hand, would you bet that the price of bitcoin will fall, say, to $ 4,000, given the ten-year history of not returning prices to their previous long-term lows? I think it takes some courage to say the least.

Most technologies that have some kind of tiedto them, the price determined in the free market is not introduced in one day. In the case of fiat currency, the deployment takes place at the same time: everyone simply receives the monetary units by the appointed date, this does not imply a maturation process. In the case of adoption of technologies such as Netscape or Facebook, the market price is unknown until the IPO (initial public offering) - often many years after the invention of the technology itself. Let me give you an example: Starbucks was founded in 1971, it went public in IPO in 1992 - in the eyes of the public, its value has remained uncertain for more than 20 years.

In addition, widespread adoption is not required.even the superiority of the accepted thing or technology. If I ask you to name the most successful restaurant of all time, you are likely to answer: "McDonald's." It should also be borne in mind that the restaurant business is notorious for the high percentage of failed enterprises. Then I will ask you:

  • Does McDonald’s offer the most delicious food?
  • The healthiest food?
  • Maybe the cheapest food?

Not. In fact, if you list all the desired qualities of a perfect dinner, McDonald’s will not match almost any of them. Nevertheless, the McDonald’s model has forever changed human behavior and food expectations around the world.

Bitcoin has many shortcomings. So what? If you list the qualities that an ideal currency should have, it turns out that Bitcoin corresponds to many of them. Bitcoin was the first in its class and it is the currency accepted by people voluntarily, unlike any previous monetary systems. Pioneers usually come out victorious in competition. Bitcoin is a new technology that goes through a gradual roll-out process, just like before an IPO, but its market value is already defined and open to everyone,

and a confident uptrend on the chart of “points of no return” of its price is an indicator of Bitcoin adoption.

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